Bill Ackman's Thesis for Shorting Realty Income (O)

Realty Income Corp (NYSE:O) has a new opponent to tangle with, none other than Pershing Square hedge fund manager Bill Ackman.  Ackman is shorting Realty Income and believes the company will suffer due to their tenants with poor credit quality, many with junk ratings.

Bill Ackman's Latest Short Position (Hedge Fund Pershing Square)
Pershing Square hedge fund manager Bill Ackman presented his latest short idea at the Great Investors Best Ideas conference in Dallas, TX where he spoke with other prominent hedge fund players such as David Einhorn of Greenlight Capital. At the conference, Ackman laid out a short thesis for Realty Income (NYSE:O).

The rationale behind his play is as such: He thinks Realty Income (O) will suffer because they have tenants with poor credit quality, many with junk ratings. Additionally, he cites the fact that many of their tenants are in the dreaded consumer discretionary segment. This sector has been notably hit due to the recession and many stores have closed down over the past 12+ months. He also mentioned that Realty Income also trades at a 7.5% cap rate or so, whereas the private market value is a 10-11% cap rate, a 40% premium.

Ackman's presentation also touched on the $26 share price level, as the stock can never seem to go all that much higher recently given the fact that they keep issuing shares around that level. They are essentially 'serial equity raisers' and their stock vesting program is a bit odd in that the older you are, the quicker your stock vests. We've certainly seen a massive wave of REIT equity dilutions over the past year, and Realty Income seems to be no different. If anything, they're even more aggressive in this regard.

Ackman also noted that the REIT is very levered to occupancy as they essentially doubled their asset base at the peak of the market during the years of 2005, 2006, and 2007. So, they certainly have their share of fundamental problems, as many other REITs in the space do. In the end, Ackman basically said that this company is appealing to your everyday retail investor due to the monthly dividend stream that they tout. He thinks this dividend will have to be cut and this would play out similarly to what we saw earlier in the year with many other major REIT players cutting dividends or paying dividends in the form of stock. And, he feels that once the dividend starts fading, so will all the retail investors. This is all the more interesting to note given that Realty Income just raised their monthly dividend to $0.1426875 per share, up from $0.142375 per share (hey Realty Income, can you guys squeeze anymore decimal places into that amount? Geez). They've now boosted their quarterly dividend each year for the past 15 years as the name currently yields 6.2%.

Realty Income Corp (NYSE:O) Chart